Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51
Why Is the FASB Issuing This Statement?
A noncontrolling interest, sometimes called a minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. The objective of this Statement is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require:
- The ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity.
- The amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income.
- Changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. A parent’s ownership interest in a subsidiary changes if the parent purchases additional ownership interests in its subsidiary or if the parent sells some of its ownership interests in its subsidiary. It also changes if the subsidiary reacquires some of its ownership interests or the subsidiary issues additional ownership interests. All of those transactions are economically similar, and this Statement requires that they be accounted for similarly, as equity transactions.
- When a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value. The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of any noncontrolling equity investment rather than the carrying amount of that retained investment.
- Entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners.
What Is the Scope of This Statement?
This Statement applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. Not-for-profit organizations should continue to apply the guidance in Accounting Research Bulletin No. 51, Consolidated Financial Statements, before the amendments made by this Statement, and any other applicable standards, until the Board issues interpretative guidance.
How Will This Statement Improve Current Accounting Practice?
This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Before this Statement was issued, limited guidance existed for reporting noncontrolling interests. As a result, considerable diversity in practice existed. So-called minority interests were reported in the consolidated statement of financial position as liabilities or in the mezzanine section between liabilities and equity. This Statement improves comparability by eliminating that diversity.
This Statement changes the way the consolidated income statement is presented. It requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. Previously, net income attributable to the noncontrolling interest generally was reported as an expense or other deduction in arriving at consolidated net income. It also was often presented in combination with other financial statement amounts. Thus, this Statement results in more transparent reporting of the net income attributable to the noncontrolling interest.
This Statement establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation. For example, a parent’s ownership interest in its subsidiary changes if the parent purchases additional ownership interests in its subsidiary or the parent sells some of its ownership interests in its subsidiary. It also changes if the subsidiary reacquires some of its ownership interests or the subsidiary issues additional ownership interests. This Statement clarifies that all of those transactions are equity transactions if the parent retains its controlling financial interest in the subsidiary. Before this Statement was issued, decreases in a parent’s ownership interest in a subsidiary could be accounted for in one of two ways: as equity transactions or as transactions with gain or loss recognition in the income statement. A parent’s acquisition of noncontrolling ownership interests in a subsidiary was previously accounted for by the purchase method. This Statement simplifies accounting standards by establishing a single method of accounting for those economically similar transactions. Eliminating the requirement to apply purchase accounting to a parent’s acquisition of noncontrolling ownership interests in a subsidiary also reduces the parent’s costs because it eliminates the need to value the assets and liabilities of the subsidiary on the date that each additional interest is acquired.
This Statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. A parent deconsolidates a subsidiary as of the date the parent ceases to have a controlling financial interest in the subsidiary. If a parent retains a noncontrolling equity investment in the former subsidiary, that investment is measured at its fair value. The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of the noncontrolling equity investment. Previously, the carrying amount of any retained investment was not remeasured and was used in determining any gain or loss on the deconsolidation of the subsidiary. Recognizing a retained investment in a former subsidiary at fair value provides more relevant information about the value of that investment on the date that the subsidiary is deconsolidated. Remeasuring any retained investment to fair value also is consistent with the requirements in FASB Statement No. 141 (revised 2007), Business Combinations, for remeasuring any previously held equity interest in an entity if the acquirer obtains control of that entity in a business combination achieved in stages (a step acquisition).
This Statement requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent’s owners and the interests of the noncontrolling owners of a subsidiary. Those expanded disclosures include a reconciliation of the beginning and ending balances of the equity attributable to the parent and the noncontrolling owners and a schedule showing the effects of changes in a parent’s ownership interest in a subsidiary on the equity attributable to the parent. This Statement therefore improves the completeness, relevance, and transparency of the information provided in the consolidated financial statements.
This Statement does not change ARB 51’s provisions related to consolidation purpose or consolidation policy or the requirement that a parent consolidate all entities in which it has a controlling financial interest. This Statement does, however, amend certain of ARB 51’s consolidation procedures to make them consistent with the requirements of Statement 141(R). It also amends ARB 51 to provide definitions for certain terms and to clarify some terminology. This Statement does not change the requirements in FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities.
In addition to the amendments to ARB 51, this Statement amends FASB Statement No. 128, Earnings per Share, so that earnings-per-share data will continue to be calculated the same way those data were calculated before this Statement was issued. That is, the calculation of earnings-per-share amounts in consolidated financial statements will continue to be based on amounts attributable to the parent.
What Is the Impact of This Statement on Convergence with International Financial Reporting Standards?
This Statement, together with the IASB’s Amendments to IAS 27, Consolidated and Separate Financial Statements, concludes a joint effort by the Board and the IASB to improve the accounting for and reporting of noncontrolling interests in consolidated financial statements while promoting the international convergence of accounting standards.
This Statement aligns the reporting of noncontrolling interests in subsidiaries with the requirements in IAS 27. Previously, entities applying international financial reporting standards (IFRSs) reported noncontrolling interests as equity, while entities applying U.S. generally accepted accounting principles (GAAP) reported those interests as liabilities or in the mezzanine section between liabilities and equity. This Statement and IFRSs also provide similar guidance for accounting for changes in a parent’s ownership interest and deconsolidation of a subsidiary and similar disclosure requirements. Thus, the issuance of this Statement eliminates a source of noncomparable financial reporting.
What Is the Effective Date of This Statement?
This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (that is, January 1, 2009, for entities with calendar year-ends). Earlier adoption is prohibited. The effective date of this Statement is the same as that of the related Statement 141(R).
This Statement shall be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all periods presented.